South Africa is already largely urbanized. Today, nearly two-thirds of South Africans live in urban centers. Although the rate of urbanization is slower in South Africa than some other emerging economies, it is projected that 77% of the country’s population will reside in urban areas by 2050. Energy from coal is intertwined with urbanization in South Africa in two important ways. First, in urban centers, baseload coal-fired power plants provide electricity to support much-needed industrial growth and the employment opportunities created. Second, coal-fired power plants have directly supported the development of several urban centers, especially in the Mpumalanga region. Since 1990, the percentage of South Africans living in urban centers has increased from 52% to 65%. The demand for electricity, and the coal that makes up 93% of South Africa’s electricity generation, has grown at similar rates during this period (see Figure 1).
Urbanites consume more electricity than their rural counterparts due to higher levels of access and more money to pay for services. The disparity is considerable: on average, urban households in South Africa consume 4800 kWh each year while rural households consume about 800 kWh. Today, South Africa’s electricity sector is facing considerable challenges—including a lack of sufficient, reliable baseload power—that could impact urbanization and overall economic growth. South Africa has also made climate commitments. All options are being explored as different energy sources will be called upon to make progress on increasing electricity generation while meeting the country’s climate goals. Thus, the South African Coal Roadmap (SACRM) was prepared to explore the activities and interventions needed for the coal industry to maximize its contribution to the country in the face of an uncertain future.
A NATION CONSTRAINED
South Africa is currently facing an electricity crisis deemed to be one of the country’s greatest challenges over the last 20 years. Rolling blackouts began in November 2014 and the power supply system will continue to be under extreme pressure, with an imminent risk of load-shedding of up to 2000 MW at any time for at least the next two to three years. This is not the first time that the country has experienced rolling blackouts. In 2007/2008, several months of load-shedding occurred, which motivated the recommissioning of three previously moth-balled power stations and a strong demand-side energy efficiency drive. Coupled with the global financial crisis and subsequent in-country economic downturn, the result was decreased electricity demand and temporary relief of pressure on the grid. Even so, ensuing grid constraints have resulted in slower economic development estimated at roughly R300 billion (~US$25 billion) or 10% of the potential economic growth. Economists’ estimates about the economic impact of the controlled blackouts on the country vary between R6 billion6 and R20 billion per month (US$0.5 billion and US$1.65 billion, respectively) for Stage 1 load shedding (i.e., 1000 MW load shed). These estimates are based on the day-to-day impact on business of running generators, changing shifts, and lost work time; the less conservative estimates include the long-term costs of job losses, stunted economic growth, and less investment in the country. The inability of the country to meet electricity demand has led to downward revisions of the economic growth forecast by the South African Reserve Bank from 2.5% to 2.2% for 2015. Several ratings agencies have also downgraded the country’s credit rating, which has had a negative impact on investor confidence in the economy.
THE ROLE OF COAL
In 1994, the majority of South Africans did not have access to electricity. Since then an ambitious electrification program has increased the proportion of electricity users in the total population from 36% to 84%. This electrification program would not have been as widespread without low-cost electricity, which, in turn, could not have been achieved without coal as a fuel source. It is because coal is abundant, accessible, secure, reliable, and affordable that it is the cornerstone of energy in South Africa—today coal is used to produce 93% of electricity and 30% of liquid fuels. In excess of 60 billion tons of coal resources and reserves remain in South Africa. The nation benefits from the coal industry in several ways apart from its contribution to affordable electricity. It is the mining industry’s top revenue earner, ahead of platinum and gold. At a time when the current account deficit is precarious, the country can ill afford to lose revenue from coal exports. Moreover, the coal industry as a whole employs 83,000 people in a country with a 25% unemployment rate, with employees earning a combined $1.6 billion in salaries and wages. With the majority (i.e., 72% in 2014) of South Africa’s primary energy coming from coal and given its demonstrated benefits to the economy, new coal-fired power plants were planned. The greatly anticipated new 4800-MW coal-fired power stations, Medupi and Kusile, were originally anticipated to start coming online in 2012.
However, both projects have been plagued by construction delays and budget overruns. The first unit of Medupi was synchronized onto the grid on 2 March 2015 and was expected to deliver roughly 780 MW onto the grid by June 2015. Neither plant will be running at full capacity before 2020. As a consequence of these delays, Eskom has been running many of the existing, aging power stations beyond their expected lifetimes and delaying scheduled maintenance to keep the lights on; this has led to breakdowns, unplanned maintenance, and a severely constrained system. Almost one-third of Eskom’s 45 GW of installed capacity is presently offline due to planned and unplanned maintenance. Despite the new capacity that has come online, including an increase in non-Eskom power production by 8.5% from 2013 to 2014, overall production has decreased by 1%. The large build program, primarily funded through tariffs, resulted in the electricity price in South Africa increasing 78% between 2008 and 2011, and it will continue to rise in real terms for several more years. The National Energy Regulator of South Africa (NERSA) approved a 12.7% increase in the electricity price for Eskom for the 2015/2016 financial year. This has significant impacts on affordability and continued access to electricity for many households and on energy-intensive businesses.
SOUTH AFRICA’S ENERGY CHALLENGES WILL REQUIRE CONTINUED COAL USE
The SACRM was developed and published in 2013 as a means to explore the activities and interventions that the coal industry should undertake to maximize its contribution to the country in the face of an uncertain future. Despite South Africa’s energy challenges, the country is working to balance its development and climate priorities. The SACRM is the only place that comprehensive information about the coal value chain has been compiled into a single document. Four scenarios were developed. These scenarios were based on the local and international response to climate change as a framework for developing the roadmap. According to the Roadmap, the country will need a total of between 85 and 125 GW of installed capacity by 2040, depending on the level of renewable energy in the mix, up from 42 GW in 2010.
THE FUTURE OF COAL IN SOUTH AFRICA
To encourage economic growth and build a thriving society, energy security is a priority. Under all of the scenarios modeled in the SACRM, including the “Low-Carbon World”, South Africa cannot afford early retirement of existing power stations. In line with this, the lives of many of the existing coal-fired power stations have been extended and are now scheduled for closure between 2030 and 2040. New power stations will be required to replace this capacity and, to meet demand growth, clarity is required on technology options that will be used. The SACRM makes some recommendations for actions necessary to keep the lights on.
Coal Roadmap Recommendations
Secure contracts for continued coal supply to existing power stations and invest in new mines. Impending coal shortfalls for the existing power stations are a serious risk to energy security. Dubbed the “coal supply cliff”, a massive shortage (in excess of 60 million tons) in coal supply is anticipated from 2018. The reasons for this are several. When the current fleet of power stations was commissioned, long-term supply contracts were signed for the life of the power station (usually 40 years). The lives of many of these power stations have since been extended, and most power stations have been run at loads higher than originally expected when the coal supply contracts were signed. In addition, some of the resources have not been as extensive as originally assumed.
The recommissioning of the three moth-balled power stations in 2008 also created additional and unexpected demand for coal. The majority of the new coal resources that could potentially fill the supply gap require extensive exploration and feasibility studies before mines can be opened and supply contracts signed. The cost of mining is increasing, due to coal being sourced from lower-quality deposits with higher operating costs associated with increased processing requirements and longer transport distances. In all scenarios in the SACRM, the price of coal to Eskom will increase. Agreement must be reached on a coal price mechanism and a fair rate of return on investment being sought by mining companies to encourage investment in new mines. The most viable model for a domestic supply coal mine is for it to be a multi-product mine that benefits from the higher returns possible on the export market. Figure 2 shows the disparity between export and domestic tonnages and prices for 2012.
Open new coal fields. Traditionally, the coal supply has come from the Central Basin, where the majority of the coal-fired power stations are located. All scenarios in the SACRM show that high-grade utility coal from the Central Basin will be very constrained from the mid-2020s onward and essentially depleted by 2040. During this time, just one mine switching from domestic to low-grade export supply could create an immediate domestic coal shortfall. To reduce this risk, it is prudent to open alternate sources of coal, of which the largest and most likely resource is the Waterberg coalfields. As rail, transmission, and water infrastructure from this area to the power stations in the Central Basin is lacking, and given the long lead times required for construction of such infrastructure, the SACRM recommends that access to the Waterberg be enabled without delay.
Resolve coal transport challenges to Central Basin power stations. In 2010, roughly 22% of the coal supplied to Eskom was delivered via road. The externalities associated with road transport include damage to roads, increased road accidents and fatalities, and increased air pollution leading to human health impacts. To address this, Eskom is undertaking a road-to-rail migration together with Transnet Freight Rail. A shift from road to rail will impact the trucking companies and associated jobs and these impacts must be carefully considered and minimized.
Align policy and licensing procedures. Investment in new mines requires a supportive and enabling regulatory environment. The current regulatory situation relating to complex environmental permitting requirements under multiple laws (and consequently multiple government departments) creates extensive delays and affects the timely delivery of mining investments. Alignment and certainty of regulatory and permitting procedures for new mines is critical. Other policies where certainty is needed include statements made by the Department of Mineral Resources regarding coal as a strategic resource, which may limit coal exports and impact negatively on investment; carbon tax or other carbon pricing mechanisms; Broad-Based Black Economic Empowerment requirements and interventions to prevent hoarding of rights and situations where a resource may be urgently needed for Eskom supply, but is not a priority for the mining company that holds the rights. The mining “majors” (Anglo American, BHP Billiton, Glencore, Exxaro, and Sasol) account for 85% of coal production in South Africa and 90% of the supply to Eskom. The remaining supply is from smaller players. Eskom now requires that 55% of their supply be sourced from black-owned businesses. The capacity of these smaller businesses to fund and develop mines may be limited, which indicates that there is a strong need for cooperative business partnerships between either Eskom or the existing majors and the smaller players.
Provide clarity on new electricity build. The future of electricity in South Africa is governed by the Integrated Resource Plan for Electricity 2010–2030 (IRP). The IRP included 9 GW of nuclear power by 2023; however, the program for investment and development of nuclear power is far behind the schedule required to have it online by 2023. A revision of the IRP is due for publication in the near future, and clarity is needed on new and replacement baseload generation as well as who is to take responsibility for the new build. The Renewable Energy Independent Power Producer Programme has been successful, bringing 1700 MW capacity to the grid, and expedition of the baseload Independent Power Producer Programme (IPP), for both coal and gas, will help to ensure energy security if favorable market conditions are created for the IPPs. Investment in electricity infrastructure ranges from R930 billion in the “More of the Same” scenario to R2060 billion in the “Low-Carbon World” scenario because of the higher capital cost of renewable technologies, which may decrease over time, and because of the additional installed capacity required due to the lower load factors of renewables. The higher capital costs are offset by lower operating costs, a diversified investment mix, and a more resilient grid. However, increased nuclear and renewables in South Africa’s energy mix is likely to result in higher electricity prices which may put additional strain on an emerging economy.
Mitigate impacts and the transition to a low-carbon economy. In the longer term, the role of coal in the electricity mix will be dependent on the ability to mitigate the environmental impacts of coal-fired power generation. Transition to a diversified grid will help to mitigate emissions, as can the improvement of power station efficiency, which will significantly reduce emissions per unit of power compared to the existing fleet. The demonstration of technologies such as underground coal gasification and high-efficiency combustion is also important. Carbon capture and storage (CCS) may also help to reduce emissions, but CCS in South Africa is in its infancy and any mitigation potential would only be realized in the long term.
Plan for closure. At least six power stations will close in the Mpumalanga region before 2040. The resulting job losses could ultimately lead to the decline of the existing urban centers that have developed around the coal-mining and power-generating region. It will be important to create diversified industries in this area and to undertake capacity building as well as skills development for the people in those areas to help to mitigate these impacts. It is recommended that transition plans are in place for communities that have developed around power plants now slated for closure.
PLANNING FOR ACTION
South Africa is currently best represented by the “At the forefront” scenario, where ambitious (albeit conditional) climate change commitments have been made. Continuing on this trajectory could have serious implications for global competitiveness, employment opportunities, and energy security. The outcome of COP21 and the country’s Intended Nationally Determined Contributions committed to at COP21 will play a large role in determining our energy future. South Africa is on the precipice of a crisis. Careful planning and prompt action are essential for a future where electricity demand can be met, economic growth takes place, and a just transition to a lower-carbon economy is possible.
June 16, 2015
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